EGU.L Regulatory News (EGU)

19 Mar 2008 07:01

European Goldfields Ltd19 March 2008 Immediate release 19 March 2008 European Goldfields Limited MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED 31 DECEMBER 2007 The following discussion and analysis, prepared as at 19 March 2008, is intendedto assist in the understanding and assessment of the trends and significantchanges in the results of operations and financial conditions of EuropeanGoldfields Limited (the "Company"). Historical results may not indicate futureperformance. Forward-looking statements are subject to a variety of factors thatcould cause actual results to differ materially from those contemplated by thesestatements. The following discussion and analysis should be read in conjunctionwith the Company's audited consolidated financial statements for the years ended31 December 2007 and 2006 and accompanying notes (the "Consolidated FinancialStatements"). Additional information relating to the Company, including the Company's AnnualInformation Form, is available on the Canadian System for Electronic DocumentAnalysis and Retrieval (SEDAR) at www.sedar.com. Except as otherwise noted, all dollar amounts in the following discussion and analysis and the Consolidated Financial Statements are stated in United States dollars. Overview The Company, a company incorporated under the Yukon Business Corporations Act,is a resource company involved in the acquisition, exploration and developmentof mineral properties in Greece, Romania and South-East Europe. The Company's Common Shares are listed on the AIM Market of London StockExchange plc and on the Toronto Stock Exchange (TSX) under the symbol "EGU". Greece - The Company holds a 95% interest in Hellas Gold S.A ("Hellas Gold").Hellas Gold owns three major gold and base metal deposits in Northern Greece.The deposits are the polymetallic operation at Stratoni, the Olympias projectwhich contain gold, zinc, lead and silver, and the Skouries copper/gold porphyryproject. Hellas Gold commenced production at Stratoni in September 2005 andcommenced selling an existing stockpile of gold concentrates from Olympias inJuly 2006. Hellas Gold is applying for permits to develop the Skouries andOlympias projects. Romania - The Company owns 80% of the Certej gold/silver project in Romania. TheCompany submitted in March 2007 a technical feasibility study to the Romaniangovernment in support of a permit application to develop the project. Results of operations The Company's results of operations for the year and three-month period ended 31December 2007 were comprised primarily of activities related to the results ofoperations of the Company's 95%-owned subsidiary Hellas Gold in Greece and theCompany's exploration and development program in Romania. Hellas Gold'soperational results for the eight most recently completed quarters aresummarised in the following tables: ---------------------------------------------------- Stratoni Mine (Greece) ------------------ ------ ------ ------ ------ ------ ------ ------ ------ 2007 2007 2007 2007 2006 2006 2006 2006 ------------------ ------ ------ ------ ------ ------ ------ ------ Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1Inventory (start ofperiod)Ore mined (wettonnes) 4,868 4,603 843 2,499 3,617 12,326 1,155 10,963Zincconcentrate(tonnes) 2,797 2 3,524 37 1,199 1,562 1,034 95Lead/silverconcentrate(tonnes) 2,042 2,150 1,846 214 1,345 674 308 1,268 ProductionOre mined (wettonnes) 50,643 56,075 53,088 55,069 47,321 49,652 47,966 31,752 Ore milled(tonnes) 53,813 54,499 48,179 55,258 47,038 56,769 35,810 40,333 - Average grade: Zinc (%) 9.00 8.42 11.57 11.39 10.73 10.54 9.45 8.89Lead (%) 8.12 7.55 9.14 7.38 6.56 5.78 5.83 7.28Silver (g/t) 206 186 232 180 162 142 146 183 Zincconcentrate(tonnes) 9,082 8,506 10,485 11,731 9,263 10,768 6,041 6,222 - Containing: Zinc (tonnes) 4,425 4,194 5,170 5,760 4,619 5,468 3,098 3,229 Leadconcentrate(tonnes) 6,012 5,586 5,955 5,406 3,993 4,368 2,703 3,662 - Containing: Lead (tonnes) 4,021 3,781 4,109 3,744 2,818 2,997 1,881 2,667Silver (oz) 316,837 297,059 328,879 288,023 216,586 227,817 141,809 207,496 SalesZincconcentrate(tonnes) 10,191 5,710 14,007 8,244 10,425 11,130 5,513 5,283 - Containing payable: Zinc (tonnes)* 4,209 2,364 5,855 3,463 4,418 4,702 2,320 2,335 Leadconcentrate(tonnes) 8,004 5,694 5,651 3,774 5,124 3,696 2,337 4,623 - Containing payable: Lead (tonnes)* 5,082 3,759 3,636 2,486 3,329 2,418 1,554 3,166Silver (oz)* 399,272 297,321 285,349 190,292 254,881 189,349 121,350 252,559 Cash operatingcost per tonnemilled ($) 175 144 135 138 147 109 115 90 Inventory (end ofperiod)Ore mined (wettonnes) - 4,868 4,603 843 2,499 3,617 12,326 1,155Zincconcentrate(tonnes) 1,689 2,797 2 3,524 37 1,199 1,562 1,034Lead/silverconcentrate(tonnes) 49 2,042 2,150 1,846 214 1,345 674 308 Financialinformation(in thousands of USdollars)Sales ($) 18,483 16,634 22,866 14,215 19,439 14,226 8,274 9,083Gross profit($) 6,147 8,425 13,991 8,294 10,477 6,973 4,330 4,295Capitalexpenditure($) 3,779 12,142 4,673 1,564 4,202 1,487 1,351 526Amortisationand depletion($) 2,000 1,256 837 653 1,119 796 942 456------------------ ------ ------ ------ ------ ------ ------ ------ ------ * Net of smelter payable deductions Sale of Gold-Bearing Concentrates from Existing Stockpile at Olympias (Greece) ---------------------------------------------------- ------ ------ ------ ------ ------ ------ ------ ------ 2007 2007 2007 2007 2006 2006 2006 2006 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 ------------------ ------ ------ ------ ------ ------ ------ ------ ------SalesGoldconcentrate(dmt) 21,385 28,393 12,686 17,090 3,299 6,134 1,905 - Financialinformation(in thousands of USdollars)Sales ($) 4,232 5,029 2,078 2,868 431 985 - -Gross profit($) 1,279 2,848 958 1,845 192 985 - -Amortisationand depletion($) (134) 265 76 120 - - - ------------------- ------ ------ ------ ------ ------ ------ ------ ------ In 2007, cash operating costs per tonne milled averaged $150 per tonne (€110).The increasing trend in US$ dollar operating costs over the year has been drivenmainly by the Euro strengthening against the US dollar. There was an increase inunderlying Q4 2007 costs to $175 (€121) per tonne from $144 (€105) per tonne inQ3 2007. This was the result of the following factors: $6 (€4) per tonne relatedto run-of-mine ("ROM") stockpile movements as brought forward ROM stockpileswere utilised in Q4 2007; $12 (€9) per tonne related to higher mill labour andtailings haulage costs, plant maintenance and port repairs and $2 (€2) per tonneattributable to a small decrease in mill throughput. The impact of thestrengthening of the Euro against the US dollar from $1.37/• in Q3 2007 to $1.45/• in Q4 2007 added $9 per tonne. Summary of quarterly results The Company's financial results for the eight most recently completed quartersare summarised in the following table: ------------------ ------ ------ ------ ------ ------ ------ ------ ------(in thousandsof US dollars, 2007 2007 2007 2007 2006 2006 2006 2006except per share Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1amounts) $ $ $ $ $ $ $ $ ------------------ ------ ------ ------ ------ ------ ------ ------ ------Statement of lossand deficitSales 22,715 21,663 24,944 17,083 19,870 15,211 8,274 9,083Cost of sales 15,289 10,390 9,995 6,944 9,201 7,253 3,944 4,788Gross profit 7,426 11,273 14,949 10,139 10,669 7,958 4,330 4,295Interest income 2,699 2,320 1,116 453 393 485 267 300Foreignexchangegain/(loss) (2,173) 6,494 (265) (152) (903) (67) 202 16Expenses 6,385 4,819 4,875 4,764 3,543 4,274 4,547 3,574Profit/(loss)before incometax 1,567 15,268 10,925 5,676 6,616 4,102 252 1,037Profit/(loss)after incometax 3,629 12,504 8,129 3,957 4,349 2,984 (311) 161Non-controlling interest (29) (348) (2,794) (1,848) (1,973) (1,509) (225) (475)Profit/(loss)for the period 3,600 12,156 5,335 2,109 2,376 1,475 (536) (314)Earnings/(loss) per share 0.02 0.07 0.04 0.02 0.02 0.01 0.00 0.00Balance sheet (endof period)Working capital 226,431 224,289 211,637 45,201 41,854 39,666 36,453 34,515Total assets 782,131 744,998 729,774 325,501 311,943 294,719 292,236 274,381Non currentliabilities 185,433 175,019 170,970 79,183 74,603 70,080 69,018 64,684Statement of cashflowsDeferredexplorationanddevelopmentcosts -Romania 2,133 1,658 1,248 696 856 598 992 848Plant andequipment -Greece 3,779 12,142* 4,673 1,577 4,144 1,268 1,599 568Deferreddevelopmentcosts - Greece 915 491 520 421 2,095 462 999 478---------------- ------ ------ ------ ------ ------ ------ ------ ------ * Includes a deposit of €6.25 million ($8.90 million) paid in July 2007 toOutotec Minerals OY for the purchase of over €30 million worth of mill and plantequipment for Skouries. Selected financial information The Company's financial results for the years ended 31 December 2007, 2006 and2005, and the three-month periods ended 31 December 2007 and 2006 are summarisedin the following table: Years ended 31 December Three-months ended 31 December ------------------- ------------------ -------- -------- ---------- ----------(in thousands of US 2007 2006 2005 2007 2006dollars)------------------- $ $ $ $ $ ------------------- -------- -------- -------- ---------- ----------Statement of loss anddeficitSales 86,405 52,438 1,521 22,715 19,870Cost of sales 42,618 25,186 1,367 15,289 9,201Gross profit 43,787 27,252 154 7,426 10,669Interest Income 6,588 1,445 1,263 2,699 393Foreign exchange gain 3,904 (752) (937) (2,173) (903)/(loss)Expenses 20,844 15,937 13,796 6,385 3,543Profit/(loss) beforeincome 33,435 12,008 (13,316) 1,567 6,616taxProfit/(loss) afterincome 28,218 7,184 (11,622) 3,629 4,349taxNon-controlling (5,019) (4,182) 1,212 (29) (1,973)interestProfit/(loss) for the 23,199 3,002 (10,410) 3,600 2,376periodEarnings/(loss) per 0.16 0.03 (0.09) 0.02 0.02shareBalance sheet (end ofperiod)Working capital 226,431 41,854 33,765 226,431 41,854Total assets 782,131 311,943 266,618 782,131 311,943Non current 185,433 74,603 62,807 185,433 74,603liabilitiesStatement of cashflowsDeferred explorationand 5,735 3,294 3,901 2,133 856development costs -RomaniaPlant and equipment - 21,606* 7,579 7,839 3,779 4,144GreeceDeferred developmentcosts - 2,347 4,032 2,840 915 2,095Greece -------- -------- -------- ---------- ----------------------------- * Includes a deposit of €6.25 million ($8.90 million) paid in July 2007 toOutotec Minerals OY for the purchase of over €30 million worth of mill and plantequipment for Skouries. The breakdown of deferred exploration and development costs by property for theyears ended31 December 2007, 2006 and 2005, and the three-month periods ended 31 December2007 and 2006 is as follows: Years ended 31 December Three-months ended 31 December ----------------------- ------------------ --------- --------- ---------- ----------(in thousandsof US dollars) 2007 2006 2005 2007 2006--------------- $ $ $ $ $--------------- -------- --------- --------- ---------- ----------Greek propertiesStratoni 1,006 (43%) 64 (2%) 398 (14%) 766 (84%) 67 (3%)Skouries 1,173 (50%) 2,806 (70%) 653 (23%) 58 (6%) 1,720 (82%)Olympias 168 (7%) 1,162 (28%) 1,789 (63%) 91 (10%) 308 (15%)--------------- -------- --------- --------- ---------- ---------- 2,347 (100%) 4,032 (100%) 2,840 (100%) 915 (100%) 2,095 (100%)--------------- -------- --------- --------- ---------- ----------RomanianpropertiesCertej 5,305 (92%) 2,965 (90%) 2,380 (61%) 1,935 (91%) 785 (92%)Cainel 13 (1%) 27 (1%) 1,014 (26%) - (-%) 4 (-%)Voia 322 (6%) 246 (7%) 78 (2%) 161 (7%) 53 (6%)Baita-Craciunesti 95 (2%) 56 (2%) 390 (10%) 37 (2%) 14 (2%)Bolcana - (-%) - (-%) 39 (1%) - (-%) - (-%)--------------- -------- --------- --------- ---------- ---------- 5,735 (100%) 3,294 (100%) 3,901 (100%) 2,133 (100%) 856 (100%)--------------- -------- --------- --------- ---------- ---------- Total 8,082 (100%) 7,326 (100%) 6,741 (100%) 3,048 (100%) 2,951 (100%)--------------- -------- --------- --------- ---------- ---------- The Certej exploitation licence and the Baita-Craciunesti exploration licenceare held by the Company's 80%-owned subsidiary, Deva Gold S.A. ("Deva Gold").Minvest S.A. (a Romanian state owned mining company), together with threeprivate Romanian companies, hold the remaining 20% interest in Deva Gold. TheCompany is required to fund 100% of all costs related to the exploration anddevelopment of these properties. As a result, the Company is entitled to therefund of such costs (plus interest) out of future cash flows generated by DevaGold, prior to any dividends being distributed to shareholders. The Voia andCainel exploration licences are held by the Company's wholly-owned subsidiary,European Goldfields Deva SRL. The Company recorded a profit (before tax) of $33.44 million for the year ended31 December 2007, compared to a profit (before tax) of $12.01 million for theyear ended 31 December 2006. The Company recorded a net profit (after tax andnon-controlling interest) of $23.20 million ($0.16 per share) for the year ended31 December 2007, compared to a net profit of $3.00 million ($0.03 per share)for the year ended 31 December 2006. The Company recorded a profit (before tax) of $1.57 million for the three-monthperiod ended 31 December 2007, compared to a profit (before tax) of $6.62million for the three month period ended 31 December 2006. The Company recordeda net profit (after tax and non-controlling interest) of $3.60 million ($0.02per share) for the three-month period ended 31 December 2007, compared to a netprofit of $2.38 million ($0.02 per share) for the three-month period ended 31December 2006. The following factors have contributed to the above: • In 2007, Hellas Gold's Stratoni mine operated at substantially higher levels than in 2006. Mine ore production increased by 22% and mill throughput increased by 18% in 2007 over 2006. This, combined with 27% higher processed lead grades in 2007, translated into increased concentrate tonnages sold of 18% for zinc and 46% for lead. In addition, in 2007, Hellas Gold sold 79,553 tonnes of gold-bearing pyrite concentrates from Olympias, compared to 11,338 tonnes in 2006. These increased activity levels combined with higher metal prices yielded significantly increased revenues and profitability for the year ended 31 December 2007 compared to 2006. In Q4 2007, ore production was 7% higher than in Q4 2006. Sales in Q4 2007 were at similar levels for zinc concentrate, but 56% higher for lead concentrate and five times higher for pyrite concentrates compared to Q4 2006. • As a result, the Company recorded a gross profit of $43.79 million in 2007 and $7.43 million in Q4 2007, on revenues of $86.41 million and $22.72 million, respectively, compared to a gross profit of $27.25 million in 2006 and $10.67 million in Q4 2006, on revenues of $52.44 million and $19.87 million, respectively. Cost of sales of $42.62 million in 2007 and $15.29 million in Q4 2007, compared to $25.19 million and $9.20 million, respectively, for the same periods of 2006, reflect the higher mine activity levels, the impact of a stronger Euro against the US dollar and included $5.07 million in amortisation and depletion expenses in 2007, compared to $3.23 million in 2006, reflecting higher throughput levels in 2007. • The Company's corporate administrative and overhead expenses have increased from $2.53 million in 2006 and $0.89 million in Q4 2006, to $4.30 million and $1.70 million, respectively, for the same periods of 2007. This reflects higher general levels of corporate activity and higher personnel costs compared to the prior period. Also, the increase in Q4 2007 over Q4 2006, is due to higher levels of employer costs resulting from the vesting of equity based compensation. • The Company recorded a non-cash equity-based compensation expense of $1.80 million in 2007 and $0.29 million in Q4 2007, compared to $2.81 million and $0.71 million, respectively, for the same periods of 2006. Whilst a higher number of share options and restricted share units were outstanding in 2007, the lower levels of charges reflect the increased level of development activities by corporate personnel. In 2007, the Company continued a practice of recharging some of its equity-based compensation expense to its operating subsidiaries, a portion of which is capitalised by such subsidiaries. • The Company recorded a foreign exchange gain of $3.90 million in 2007 and a loss of $2.17 million in Q4 2007. This gain resulted primarily from unrealised gains on translation into US dollars of funds held in various other currencies, in a weakening US dollar environment. The Company realised a foreign exchange loss of $0.75 million in 2006 and $0.9 million in Q4 2006. • Hellas Gold's administrative and overhead expenses amounted to $9.83 million in 2007 and $3.17 million in Q4 2007, compared to $5.50 million and $1.96 million, respectively, for the same periods of 2006. Hellas Gold's administrative and overhead expenses have increased significantly in 2007 compared to 2006 due to higher levels of community and local activities where the Company is involved in several local projects in the vicinity of the mine, including the refurbishment of local buildings and amenities. In addition, Hellas Gold incurred higher levels of public relation and finance costs. • Hellas Gold incurred an expense of $4.32 million in 2007 and $1.07 million in Q4 2007, compared to $2.70 million and $0.56 million, respectively, for the same periods of 2006, for ongoing water pumping and treatment at its non-operating mines of Olympias and Stratoni (Madem Lakkos), in compliance with Hellas Gold's commitment to the environment under its contract with the Greek State. At Madem Lakkos, in particular, a significantly higher amount of backfilling of underground voids took place in 2007 compared to 2006. Additional costs were also incurred in 2007, making underground areas in the old Madem Lakkos mine safe for backfilling activities. • Hellas Gold incurred an expense of $Nil in 2007 and $Nil in Q4 2007, compared to a non-recurring expense of $1.63 million and $0.67 million, respectively, for the same periods of 2006, for the maintenance of old adits and equipment at Stratoni. • The Company recorded a charge for income taxes of $5.22 million in 2007 and a credit of $2.06 million in Q4 2007, compared to charges of $4.82 million and $2.27 million, respectively, for the same periods of 2006. The charge in 2007 has arisen due to the Company providing for current tax on Hellas Gold profits and a residual future tax liability resulting from the elimination of the future tax asset based on losses carried forward in Hellas Gold. The charges in 2006 had arisen due to the Company reducing its future tax asset relating to the reduction of losses carried forward in Hellas Gold. In Q4 2007, the Company was able to recognise a tax asset as confidence increased that brought forward tax losses would be utilised. • The Company recorded a charge of $5.02 million in 2007 and $0.03 million in Q4 2007 relating to the non-controlling shareholder's 5% interest (35% prior to 28 June 2007) in Hellas Gold's profit (after tax) for these periods, compared to $4.18 million and $1.97 million, respectively, for the same periods of 2006. In general, the increase in 2007 reflects the substantial increase in profits at Hellas Gold being attributable to the non-controlling shareholder. However, at the end of Q2 2007, the non-controlling shareholder's investment in Hellas Gold fell from 35% to 5% and therefore there was a large reduction in Q3 and Q4 2007's non-controlling shareholder's interest relating to this change in ownership structure. Liquidity and capital resources As at 31 December 2007, the Company had cash and cash equivalents of $218.84million, compared to $34.59 million as at 31 December 2006, and working capitalof $226.43 million, compared to $41.85 million as at 31 December 2006. The increase in cash and cash equivalents as at 31 December 2007, compared tothe balances as at 31 December 2006, resulted primarily from the net proceeds ofan equity financing ($122.91 million), advanced sales proceeds from offtakers($64.39 million), operating cash flow ($43.57 million) and the effect of foreigncurrency translation on cash ($1.93 million), offset by capital expenditure inGreece ($21.61 million), cash paid as partial consideration for the acquisitionby the Company of an additional 30% interest in Hellas Gold in June 2007(including costs) ($9.97 million), a net increase in accounts receivable vs.accounts payable ($7.08 million), deferred exploration and development costs inRomania ($5.74 million), deferred development costs in Greece ($2.35 million) ,an increase in inventory ($1.16 million) and an increase in restricted cash($0.56 million) The following table sets forth the Company's contractual obligations includingpayments due for each of the next five years and thereafter: Payments due by period (in thousands of US dollars) ------------------------------------- -------- ---------- --------- --------- ---------Contractual Total Less than 1 1 - 3 years 4 - 5 years After 5 yearsobligations -------- year --------- --------- ------------------------- ----------Operatinglease (Londonoffice) 1,209 193 387 387 242Explorationlicencespendingcommitments(Voia,Romania) 806 - 806 - -Outotec OT -ProcessingPlant 43,526 19,576 23,950 - ----------------- -------- ---------- --------- --------- ---------Totalcontractualobligations 45,541 19,769 25,143 387 242---------------- -------- ---------- --------- --------- --------- In 2008, the Company expects to spend a total of $60 million in capitalexpenditures to fund the development of its project portfolio. This amountcomprises $12 million at its existing operation at Stratoni to complete andexpand the internal underground infrastructure at Mavres Petres and upgrade themill, $10 million at Olympias in order to start the refurbishment of the mineand process plant, and $25 million at Skouries as the Company expects tocontinue to spend on long lead time equipment and commence site preparation. AtCertej, the Company expects to spend $13 million as it finalises its bankablefeasibility study and increases exploration on potential satellite orebodiesclose to Certej. In addition to its capital expenditure programme, the Companyexpects to spend $2 million in exploration over the wider licence area inGreece, $13 million on Hellas Gold administrative and overhead and watertreatment expenses, and $4 million on corporate administrative and overheadexpenses. The Company expects to fund all such costs from existing cashbalances and operating cash flow generated at Stratoni. Transactions with related parties During the year ended 31 December 2007, Hellas Gold incurred costs of $27.89million (2006 - $18.05 million) for management, technical and engineeringservices received from a related party, Aktor S.A., a 5% shareholder in HellasGold. As at 31 December 2007, Hellas Gold had accounts payable of $2.13 million(2006 - $4.18 million) to Aktor S.A. These expenses were contracted in thenormal course of operations and are recorded at the exchange amount agreed bythe parties. Critical accounting estimates The consolidated financial statements have been prepared on a going concernbasis in accordance with accounting principles generally accepted in Canada("Canadian GAAP"), which assumes the Company will be able to realise assets anddischarge liabilities in the normal course of business for the foreseeablefuture. The consolidated financial statements do not include the adjustmentsthat would be necessary should the Company be unable to continue as a goingconcern and reflect the following critical accounting estimates. Deferred exploration and development costs - Acquisition costs of resourceproperties, together with direct exploration and development costs incurredthereon, are deferred and capitalised. Upon reaching commercial production,these capitalised costs are transferred from exploration properties to producingproperties on the consolidated balance sheets and are amortised into operationsusing the unit-of-production method over the estimated useful life of theestimated related ore reserves. Based on annual impairment reviews made by management, in the event that thelong-term expectation is that the net carrying amount of these capitalisedexploration and development costs will not be recovered such as would beindicated where: - Producing properties: • the carrying amounts of the capitalised costs exceed the related undiscounted net cash flows of reserves; - Exploration properties: • exploration activities have ceased; • exploration results are not promising such that exploration will not be planned for the foreseeable future; • lease ownership rights expire; or • insufficient funding is available to complete the exploration program; then the carrying amount is written down to fair value accordingly and thewrite-down amount charged to operations. Impairment of long-lived assets - All long-lived assets and intangibles held andused by the Company are reviewed for possible impairment whenever events orchanges in circumstances indicate that the carrying amount of an asset may notbe recoverable. If changes in circumstances indicate that the carrying amount ofan asset that an entity expects to hold and use may not be recoverable, futurecash flows expected to result from the use of the asset and its disposition mustbe estimated. If the undiscounted value of the future cash flows is less thanthe carrying amount of the asset, impairment is recognised based on the fairvalue of the assets. Asset retirement obligation - The fair value of the liability of an assetretirement obligation is recorded when it is legally incurred and thecorresponding increase to the mineral property is depreciated over the life ofthe mineral property. The liability is increased over time to reflect anaccretion element considered in the initial measurement at fair value. As at 31December 2007 and 2006, the Company had an asset retirement obligation relatingto its Stratoni property in Greece. Revenue recognition - Revenues from the sale of concentrates are recognised andare measured at market prices when the rights and obligations of ownership passto the customer. A number of the Company's concentrate products are sold underpricing arrangements where final prices are determined by quoted market pricesin a period subsequent to the date of sale. These concentrates are provisionallypriced at the time of sale based on forward prices for the expected date of thefinal settlement. The terms of the contracts result in non-hedge derivativesthat do not qualify for hedge accounting treatment, because of the differencebetween the provisional price and the final settlement price. These embeddedderivatives are adjusted to fair value through revenue each period until thedate of final price determination. Subsequent variations in the price arerecognised as revenue adjustments as they occur until the price is finalised. Equity-based compensation - The Company operates a share option plan and arestricted share unit plan. The Company accounts for equity-based compensationgranted under such plans using the fair value method of accounting. Under suchmethod, the cost of equity-based compensation is estimated at fair value and isrecognised in the profit and loss statement as an expense, or capitalised todeferred exploration and development costs when the compensation can beattributed to mineral properties. This cost is amortised over the relevantvesting period for grants to directors, officers and employees, and recorded infull at the earlier of performance completed or vesting for grants tonon-employees. Any consideration received by the Company on exercise of shareoptions is credited to share capital. Estimates, risks and uncertainties - The preparation of financial statements inconformity with generally accepted accounting principles requires management tomake estimates and assumptions that affect the reported amount of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amount of revenues and expenses duringthe period. Significant estimates and assumptions include those related to therecoverability of deferred exploration, development costs for mineralproperties, asset retirement obligations and equity based compensation. Whilemanagement believes that these estimates and assumptions are reasonable, actualresults could vary significantly. Significant changes in accounting policies Effective 1 January 2007, the Company adopted the revised CICA Section 1506"Accounting Changes", which requires that: a voluntary change in accountingprinciples can be made if, and only if, the changes result in more reliable andrelevant information, changes in accounting policies are accompanied withdisclosures of prior period amounts and justification for the change, and forchanges in estimates, the nature and amount of the change should be disclosed.The Company has not made any voluntary change in accounting principles since theadoption of the revised standard. Financial Instruments - Recognition and Measurement, Section 3855 - Thisstandard prescribes when a financial asset, financial liability, ornon-financial derivative is to be recognised on the balance sheet and whetherfair value or cost-based methods are used to measure the recognised amounts. Italso specifies how financial instrument gains and losses are to be recognised. Effective 1 January 2007, the Company's cash and cash equivalents, temporaryinvestments and investments in marketable securities have been classified asavailable-for-sale and are recorded at fair value on the balance sheet. Fairvalues are determined directly by reference to published price quotations in anactive market. Changes in the fair value of these instruments are reflected inother comprehensive income and included in shareholders' equity on the balancesheet. All derivatives are to be recorded on the balance sheet at fair value.Mark-to-market adjustments on these instruments will be included in net profit,unless the instruments are designated as part of a cash flow hedge relationship.In accordance with the standard's transitional provisions, the Company realisedas separate assets and liabilities only embedded derivatives acquired orsubstantively modified on or after 1 January 2003. All other financial instruments will be recorded at cost or amortised cost,subject to impairment reviews. The criteria for assessing other than temporaryimpairment remain unchanged. Transaction costs incurred to acquire financialinstruments are included in the underlying balance. The Company has determinedthat the adoption of Section 3855 had no material effect on these financialstatements. Hedges, Section 3865 - This standard is applicable when a company chooses todesignate a hedging relationship for accounting purposes. It builds on theprevious AcG-13 "Hedging Relationships" and Section 1650 "Foreign CurrencyTranslation", by specifying how hedge accounting is applied and what disclosuresare necessary when it is applied. The Company uses derivative and non-derivativefinancial instruments to manage changes in commodity prices. Hedge accounting isoptional and it requires the Company to document the hedging relationship andtest the hedging item's effectiveness in offsetting changes in fair values orcash flows of the underlying hedged item on an ongoing basis. The Company uses cash flow hedges to manage commodity prices. The effectiveportion of the change in fair value of a cash flow hedging instrument isrecorded in other comprehensive income and is reclassified to earnings when thehedge item impacts profit. Any ineffectiveness is recorded in net profit. If a derivative instrument designated as a cash flow hedge ceases to beeffective or is terminated, hedge accounting is discontinued and the gain orloss at that date is deferred in other comprehensive income and recognisedconcurrently with the settlement of the related transaction. If a hedgedanticipated transaction is no longer probable, the gain or loss is recognisedimmediately in profit. Subsequent gains and losses from ineffective derivativeinstruments are recognised in profit in the period they occur. Comprehensive Income, Section 1530 & 3251 - Effective 1 January 2007, theCompany adopted sections 1530 and 3251. These standards require the presentationof a statement of comprehensive income and its components. Comprehensive incomeincludes both net profit and other comprehensive income. Other comprehensiveincome includes holding gains and losses on available-for-sale investments,gains and losses on certain derivative instruments and foreign currency gainsand losses relating to self-sustaining foreign operations, all of which are notincluded in the calculation of net earnings until realised. Disclosure controls and procedures & internal control over financial reporting The Chief Executive Officer and the Chief Financial Officer of the Company (the"Certifying Officers") have established and maintained in the year ended 31December 2007 disclosure controls and procedures and internal control overfinancial reporting for the Company. The Certifying Officers have caused disclosure controls and procedures to bedesigned under their supervision, to provide reasonable assurance that materialinformation relating to the Company and its subsidiaries is made known to theCertifying Officers by others within those entities, as appropriate to allowdecisions regarding required disclosure within the time periods specified bylegislation, particularly during the period in which interim and annual filingsare being prepared. The Certifying Officers have evaluated the effectiveness of the Company'sdisclosure controls and procedures as at 31 December 2007 and have concludedthat such procedures are adequate to meet the objectives for which they wereestablished. The Certifying Officers believe that "cost effective" disclosurecontrols and procedures and internal control systems can only provide reasonableassurance, and not absolute assurance, that such objectives are met. The Certifying Officers have caused internal control over financial reporting tobe designed under their supervision, to provide reasonable assurance regardingthe reliability of financial reporting and the preparation of financialstatements for external purposes in accordance with Canadian GAAP. During the year ended 31 December 2007, there has been no change in theCompany's internal control over financial reporting that have materiallyaffected, or is reasonably likely to materially affect, the Company's internalcontrol over financial reporting. Outstanding share data The following represents all equity shares outstanding and the number of commonshares into which all securities are convertible, exercisable or exchangeable: Common shares: 179,162,381Common share options: 3,171,665Restricted share units: 335,000Common shares (fully-diluted): 182,669,046 Preferred shares: Nil Outlook Reference is made to the Company's news release dated 19 March 2008 whichaccompanies this Management's Discussion and Analysis. Risks and uncertainties The risks and uncertainties affecting the Company, its subsidiaries and theirbusiness are discussed in the Company's Annual Information Form for the yearended 31 December 2007, filed on SEDAR at www.sedar.com. 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